Every American has access to $734,000 in wealth, according to a new report by the World Bank, The Changing Wealth of Nations: Measuring Sustainable Development in the New Millennium. But most of it—85 percent—is “intangible.” The U.S. ranks first in the world in intangible wealth per capita, at $628,000. In comparison, the average Chinese has access to just $19,234, of which $8,921 is intangible.
These are the estimates that Kirk Hamilton, lead economist in the Development Research Group of the World Bank, and his team calculated for the update to their groundbreaking 2006 report Where Is the Wealth Of Nations?: Measuring Capital for the 21st Century. The new study finds that between 1995 and 2005 global wealth increased by 34 percent and that 80 percent of the additional wealth created consists of intangible capital.
We all intuitively know what tangible wealth is. It’s oil wells, automobile factories, houses, roads, sewage treatment plants, farms, forests, and so forth. But what is intangible wealth? As The Changing Wealth of Nations explains, such wealth consists of “human capital, social, and institutional capital which includes factors such as the rule of law and governance that contribute to an efficient economy.” The World Bank report quantifies how living in free countries with honest governments surrounded by educated people dramatically boosts your ability to earn income and create wealth. The poorest countries, meanwhile, have the worst governments and least educated people, with economies that depend on exploiting natural resources. Think of oil-rich Nigeria, where corruption runs rampant, social trust is fragile, and adult literacy is just 60 percent. On the World Bank’s rule of law index Nigeria scores 63rd on order and security out of the 66 countries ranked, whereas the United States ranks 13th.
The policy conclusion is that if countries want to get rich they must aim at improving their human capital (educating their citizens), strengthening the rule of law, and making government accountable. Otherwise, they will remain mired in poverty.
reason interviewed Hamilton back in 2006, so we invited him to drop by our Washington, D.C., office to catch up on his latest findings. A version of this interview can be seen at reason.tv.
reason: Why did you write this book?
Kirk Hamilton: It’s part of a 15-year work program at the World Bank to say: How do we get beyond GDP? We know finance ministers everywhere say the growth of GDP is how we measure our success, but we have a strong sense that it is only picking up part of the story when we talk about development. It doesn’t pick up the fact that you’re depleting your natural resources. It doesn’t pick up the fact that policies and institutions are changing over time. You see the outcome of that if the changes are positive. You also see the outcome if the changes are negative. But you don’t really have a more direct measure of how the wealth of the country is changing. So this is a long-term project to try to build up evidence on this question of where is the wealth of nations. Coming out of that then we can start to change how development policies are implemented.
reason: OK, so where is the wealth of nations?
Hamilton: We now have three years of estimates of the wealth of nations: 1995, 2000, and 2005. Some things changed between the two books and some things are the same. What’s certainly the same is that the intangible wealth of nations is still the largest share of wealth in virtually all countries. In low-income countries it’s about half of wealth, about 50 percent. But for high-income countries like the United States it’s as high as 80 percent or more.
When we look at developing countries, however, we see something interesting, which is that the natural resource base for them is a much more important share of wealth. It’s something like over 30 percent of the wealth of low-income countries compared with produced capital—buildings, machines, infrastructure, things like that—which is about half that. So for low-income countries in particular, how they manage their natural wealth is a big part of the development story. But half of the wealth is still intangible—it’s still this mixture of human capital, institutional quality, social capital, all those things that aren’t measured directly in the national accounts.
reason: Let’s go through some of those components: What is natural capital?
Hamilton: In the data that we have it consists largely of land. Agricultural land is a big part of the story, especially in low-income developing countries. But forest land as well; we look at some of the services that forests provide as well as the timber values. We put a very rough value on protected areas. If you think of the national parks in the U.S., we have a very crude estimate on the wealth that represents. And then we have data on about a dozen types of minerals, and then oil, gas, and coal. In many countries those are the big natural assets.
reason: What about produced capital?
Hamilton: It’s all the assets that we produce. So infrastructure, like roads, highways, ports, buildings, whether it’s office buildings or private dwellings. Those are the big things that produce assets. Things that aren’t used up in a year, that produce a service over time.
reason: That’s what most people think of as wealth: natural wealth plus the produced wealth. But there’s something else that looms much larger—intangible capital. What is that?
Hamilton: That’s the skills and the knowledge that people have in their heads. It’s what you can do with your head as opposed to what you can do with two hands and two feet.
reason: In your concrete figures for intangible wealth in some countries, the institutions are reducing the human capital value by more than the value of the capital, right? In some of these places it’s negative $200,000.